Consumer price inflation registered +0.4% month-on-month (m/m) in September, following August’s 0.1% increase. On a year-over-year (y/y) basis, headline inflation edged down by 0.1 percentage points (pp) from August (8.3%), slowing to 8.2%.
Energy prices fell by 2.1% m/m, as gasoline prices pulled back 4.9% m/m. Unfortunately, the decline in gasoline was partially offset by rising electricity and natural gas prices. Food prices rose 0.8% m/m (the same as in August), and are up 11.2% y/y.
Core inflation (excludes volatile items such as food & energy) was 0.6% m/m – equal to August’s gain. Relative to last September, core prices are up 6.6% – 0.3 pp higher than last month.
Price growth across core services (+0.8% m/m) accelerated from last month’s gain of 0.6% m/m. Shelter costs (+0.7% m/m) were again a meaningful contributor, with rent of primary residence and owner’s equivalent rent both rising 0.8% m/m. Other categories including medical (1.0% m/m), transportation (1.9% m/m) and recreation (0.2% m/m) were also higher on the month. Price growth in education and communication services was unchanged (0.2% m/m) in August.
In a piece of good news, core goods prices (0.0% m/m) decelerated in September and resumed their downward year-over-year trajectory. Slowing price growth was seen across all categories as household furnishings (+0.6% m/m), apparel (-0.3% m/m), recreational (0.0% m/m), and transportation (-0.2% m/m) goods all decelerated. Price declines in transportation were led by a 1.1% m/m decline in used vehicle prices as new vehicle prices rose 0.7% m/m.
Key Implications
Ouch! Another month and another disappointing CPI report. Both the headline and core figures surprised to the upside and show that August’s report was not a one-off. Looking forward, shelter costs will continue to underpin strong services inflation. So, despite multi-decade high mortgage rates and cracks emerging in the housing market, inertia in rents and homeownership costs will take time to moderate and be reflected in the CPI data. The good news is that the downward trajectory in core goods prices has resumed as price gains slowed to 6.6% in September from 7.1% in August.
Persistently strong core price inflation in September is going to keep the pressure on the Fed to keep the rate hikes coming. We continue to expect that the official policy rate will rise to 4.5% by early next year.
